Israel’s banking supervisor, Hedva Ber, warned on Wednesday that the levels of household credit in the economy were rising and said the banking sector was suffering from over-regulation that needs to be halted.
At a press conference in Tel Aviv, Ber, the supervisor of banks at the Bank of Israel, said it was important that a growth in the amount of credit and the number of credit providers in the market not lead to a flood of credit to households that would have a negative impact on some borrowers.
In 2016, the number of private customers having difficulty repaying their debts increased, and the banks’ credit losses in the area of retail credit increased to the relatively high level of 0.85 percent of credit, data provided by the central bank showed.
“The risk of consumer credit has grown,” she said. “And we must be careful. Food without salt is not tasty, but too much salt is not healthy. This is the same for credit,” she said.
Low interest rates and readily available funds due to the entry of a mass of financing platforms, institutional investors, and designated nonbank credit providers into the retail credit field, alongside increased effort on the part of credit card companies to expand their activities against the background of separating two of them from the large banks, may lead to an oversupply of credit to households, she warned.
“These lenders don’t see the whole picture of the consumer — what other loans they may have,” she said. A database of credit-worthiness of consumers is in the works, she said, but that could take time. And in the meantime, she warned, the situation “is dangerous.”
Even so, she said, the current leverage of households is still reasonable by international comparison. Excluding mortgages, Israel’s household debt is 14% of gross domestic product, compared to 25% for the US and lower than the global average, she said.
Credit to households in 2011-2016 rose by almost 50%, data provided by the Bank of Israel shows, with lending by credit card companies rising by 50%-60% in the past 3 years. More and more households are finding it difficult to repay their debt and the loans are getting larger and longer.
The central bank has already issued instructions to banks to curb their appetite for risk and to check households in a holistic manner before granting credit. “If we see the problem is growing, we have many tools” to use to curb the ballooning of this lending, she said. “We will not hesitate to use them.”
Regulatory certainty required
Ber also warned of the threat of over-regulation in the banking sector, which, besides undergoing a digital revolution, has also been subject to a wave of reforms aimed at lowering banking costs for consumers and increasing competition in the sector, which is dominated by two large banks, Bank Hapoalim Ltd. and Bank Leumi Le-Israel Ltd.
The Finance Ministry has spearheaded reforms, including the separation of two credit card companies from Hapoalim and Leumi, while the Bank of Israel is acting to remove entry barriers to additional banking players, to encourage the establishment of a new digital bank, and has also issued a license for a new merchant acquirer that is expected to provide services to small and medium businesses and to compete with the three credit card companies currently operating in Israel.
“In the past two years, many legislative initiatives in banking and finance were promoted, and additional initiatives are currently being advanced,” Ber said. “It is very important to me that we now focus on implementing all the changes generated by the new legislation, and avoid the advancement of new legislative initiatives.”
“These changes are complex, and we must direct their implementation so that they will fully benefit the public. The creation of regulatory certainty is also necessary so that investors will consider entering the industry, purchasing the credit card companies and even establishing new financial entities,” she said.
The finance minister agrees with her that new legislation should be halted and that implementation is now the way forward, she said.
“We want to give regulatory certainty to the new participants in the sector,” she said. All potential investors request this, she said, and the halt in new regulation will enable the market to find “a new balance.”
Israel’s banking system is undergoing a “digital revolution,” she said, and the banks are offering more technological tools and new services for customer use, such as cellular applications that enable customers to execute almost all banking activity remotely and with greater convenience; more sophisticated ATMs through which customers can execute a greater number of transactions; personal warnings that the banks send to customers to assist them in informed financial activity; and centralized cash management information for businesses covering all their accounts.
“We have seen that the public consumes more than 50 percent of banking services from outside the branches, through various direct means, and this rate is increasing” and will increase even more going forward, she said. More than 4 million bank customers use the internet for their transactions in Israel, some 70% of the sector’s clients, she said, and more than 1 million use apps for their transactions.
As a result of these changes, Israeli banks are closing branches: 23 were closed in 2016. The Bank of Israel has allowed the closure of an additional 60 branches in 2017 and the opening of 10 new ones.
“Our assessment is that the public’s transition to consuming banking services outside the branch will continue and expand in the coming years, and that the decline in the number and size of bank branches will continue, similar to the trend in Europe and in the US,” she said.
Israeli banks have also started to become more efficient by cutting costs. In 2016, 1,940 employees left the banks, and this trend is expected to continue in 2017 and in the coming years, she said. Between 2011 and 2016 the number of employees in the banking system has declined by some 9.5% — or 4,569 employees — the Bank of Israel said.
Even with all these changes, Israeli banks continue to show stability in 2016, and increased both their capital and liquidity and their dividend payments.
The banks’ profitability remains at an average of 8–9 percent, against the background of very low credit losses and an increase in total assets and despite the low interest rate environment and increased capital, she said.